This paper takes a new look at the cross-border dividend-stripping transactions that gave rise to the Fifth Circuit's opinion in Compaq v. Commissioner and the Eighth Circuit's opinion in IES Industries v. Commissioner. In both cases, the circuit courts held for the taxpayers and rejected the Commissioner's claim that the transactions lacked economic substance because the taxpayers were sure to lose money on the transactions before taxes. These cases generated extensive commentary that was split into two diametrically opposed camps. One group argued that the decisions were correct because the transactions were economically profitable business transactions. The other group argued that the transactions were blatant, abusive tax shelters; and that the courts should have struck them down. Because the commentators in the second group conceded that the transactions generated a pre-tax profit, these commentators also offered a range of proposals to modify or replace the pre-tax profit test. Although the tax benefit of crossborder dividend-stripping was sharply reduced by subsequent Congressional enactments, that action hid rather than resolved the issue whether the tax shelter jurisprudence is fundamentally flawed because there is a class of abusive transactions that produce a guaranteed profit before tax, but do not run afoul of the anti-abuse provisions in the tax law.

This paper argues that the Compaq and IES Industries transactions do not reveal any fundamental failings with either anti-abuse jurisprudence generally or the pre-tax profit test in particular. This paper demonstrates that the circuit courts reached the wrong conclusions in those cases because the parties, the courts, and the commentators all ignored implicit taxes. That is not surprising because the implicit taxes in these cases were difficult to see. These taxes were negative implicit taxes, which drove down the cum dividend price of the stripped stock, and therefore made the transactions appear profitable before taxes. However, once implicit taxes are taken into account, the transactions in those cases are properly understood to be unprofitable before taxes.

Finally, nearly ten years ago, Charlotte Crane observed that tax doctrine has all but ignored implicit taxes and she challenged commentators, lawyers and judges to think carefully about how implicit taxes can be incorporated into tax doctrine. My proposal to calculate pre-tax profit for the purpose of anti-abuse jurisprudence before both implicit and explicit taxes is, I believe, the first proposal to explicitly recognize implicit taxes in tax doctrine.